Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

The Latin American Economy in the
Post-Chavez Era

KIM Hwa-Nyeon

May 24, 2013

Following the death of Venezuelan President Hugo Chavez, Venezuela's top leadership has changed hands, raising expectations of far-reaching changes across Latin America. Heading up the leftist camp in Latin America, Hugo Chavez had served as the centerpiece of Latin American leftism. Changes in the political landscape of Venezuela stand to trigger a seismic shift in Latin America, much like the 1990 collapse of communism and the Arab Spring did in Eastern Europe and the Middle East respectively. Changes in Venezuela in particular, as the world's largest holder of proven oil reserves, merit close attention. Ruling party candidate Nicolas Maduro, Hugo Chavez's hand-picked successor, narrowly won Venezuela's presidential election on April 14, allowing him to follow through with the socialist policies of the late Hugo Chavez. However, Nicolas Maduro is likely to face various challenges, including demands for price stabilization and regional cooperation. This paper is intended to shed light on the effects of C
havez's death on Latin America's politics & diplomacy, trade & investment and energy supplies.

On the political front, left-leaning governments in Latin America are expected to gradually move from their hardline stance towards centrist pragmatism, as a new leader that can replace Hugo Chavez is unlikely to emerge. Under such circumstances, the Brazilian model (or "Lulaism" named after former Brazilian president Luiz In찼cio Lula da Silva), which seeks economic stability, productive welfare and openness to the outside world, will further gain ground. In addition, a decline in anti-US sentiment will pave the way for increased trade with the US.

Latin America in the post-Chavez era is expected to see Brazil-led regional integration and trade cooperation accelerating as regional trade liberalization gains headway. Regional integration will revolve around the Brazil-led Southern Common Market (or Mercosur) and trade liberalization will make progress in the form of the Pacific Alliance, which includes Mexico. Though there is potential for some nations to resort to extremist policies, Latin American nations will likely warm to economic pragmatism over the mid and long term, revamping the investment environment for foreign companies.

Though Venezuela's growing geographical risks may stunt growth in oil production in the short term, a pickup in investment can ramp up oil production in the mid and long-term. Demand for Venezuelan oil exploration, as well as for resource development from neighboring oil-producing nations like Ecuador, is likely to climb. Once Venezuela's oil exports to the US rebound to pre-Chavez levels on the back of brisk oil development in Venezuela and its neighboring nations in the mid and long-term, the price of WTI (West Texas Intermediate) may fall as much as 9% at most.

In the short term, the power vacuum created by the death of Hugo Chavez can fuel uncertainties and political instability in far-left Latin American countries. In the mid and long term, however, the Latin American economy is likely to grow sustainably, propped up by widespread leanings towards pragmatism and scaled-up efforts to mend fences with the US. Since more opportunities will arise to make inroads into the Bolivarian Alliance for the Peoples of Our America (or ALBA), as a result of the advent of a new administration in Venezuela, Korean companies should target the resources and infrastructure markets in the region, while keeping a wary eye on short-term risks. At the same time, Korea needs to move towards signing FTAs with Mexico, a member of the Pacific Alliance, and the Brazil-led Mercosur.